Finance 129 Financial Institutions Management. Syllabus Textbooks Financial Institutions Management...
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Finance 129
Financial Institutions Management
Syllabus
TextbooksFinancial Institutions Management
PrerequisitesFinance 101, Econ 105, Junior Standing
Rules of the GameOffice Hours /Contact Information GradesWebsite
AssignmentsExaminations DisabilitiesAcademic Misconduct Evaluations
Academic Misconduct
Examples (include but not limited to:)Copying from another student’s paper, laboratory report or other report, or computer files and listings;Using, during a test material and/or devices not authorized by the person in charge of the test;Without the instructors permission, collaborating with another, knowingly assisting another or knowingly receiving the assistance of another in writing an examination or in satisfying any other course requirement;
Misconduct Continued
Incorporating into written assignments materials written by others without giving them credit, or otherwise improperly using information written by others (including that which may be stored on computer disks or other technological devises), or buying and submitting commercially prepared papers as one’s own work;Submission of multiple copies of the same or similar papers without prior approval of the instructors involved;Claiming as one’s own work that which was done by tutors or others with no mention of credit to or the assistance of those persons.
Grades
Individual Assignments 200 points (20%)Sept 15th 50 points Oct 13th 50 points Nov 3rd 50 pointsNov 22nd 50 points
Group Assignments (10%) 100 points
Tests (70%)Sept 29th and Nov 10th 200 points each Final 300 points December 13th
Course Description
Bank Vs. Financial Institutions ManagementYears of deregulationFinancial Services Modernization Act 1999 (Gramm-Leach Bliley Act)
The “New” Financial Industry Shadow Banking
Fall out from the credit crisisThe current economic environment
The Modern Bank
Services Provided:Credit (loan) servicesThrift (savings) servicesPayment (transaction) servicesInvestment and financial planning servicesInvestment Banking (security underwriting)Brokerage (trading) servicesInsurance ServicesOther
Course Topics
Depository Institutions and the Financial System.Introduction, financial intermediation
Intro to ManagementUBPR, Dupont Analysis, Financial Analysis
Measuring Risk in FI’sGAP analysis (Rate sensitive assets and liabilities)Market, Liquidity, Credit, Operational and other Risks
Managing RiskLiability and Liquidity Risk, Capital Adequacy
International AspectsForeign Exchange and Sovereign Risk
Background
Financial Institutions (FI) – Channel funds from individuals and institutions with a surplus of funds to (suppliers) to those with a shortage or funds (users of capital).
Banks, Credit UnionsInsurance CompaniesMutual FundsPension Funds
**www.financialsectorfacts.org
Distribution of Assets
US Financial Sector
Accounts for over 7.6 million jobs (approximately 5% of workforce)*Activities in the industry account for approximately 20% of GDP**
http://www.bls.gov/iag/tgs/iag50.htm ** average reported from 200-2007 by financialsectorfacts.org ** average reported from 200-2007 by financialsectorfacts.org
Categories of FI’s
Depository InstitutionsBanks, Savings and loans, Thrifts, Credit Unions
Nondepository InstitutionsInsurance Co’s, Investment Banks, securities firms, mutual funds and finance companies
Similar Risks and Rewards
All Financial Institutions:Hold Assets that are subject to default (or credit) riskAre exposed to interest rate risk based on maturity of assets and liabilitiesExposed to liquidity (withdraw) risksFace operational costs and risks
Without FIs
Corporations
(net borrowers))
Households
(net savers)
Cash
Equity & Debt
©2003 McGraw-Hill Companies Inc. All rights reserved
Problems w/o FI’s
Monitoring is costlyExposes households to increased risk
Lack of LiquidityHouseholds may not be able to easily convert claims to cash
Price RisksPrices fluctuate
With FIs as Intermediaries
Cash
Households Corporations
Equity & Debt
FI
(Brokers)
FI
(Asset Transformers)
Deposits/Insurance Policies
Cash
©2003 McGraw-Hill Companies Inc. All rights reserved
Special Roles played by FI’s
Economy - Wide ServicesInformation, Liquidity, Price risk reduction, Transaction cost and Maturity intermediation services
Institution Specific ServicesMonetary policy transmission (depository Institutions), Credit allocation (thrifts, farm banks), Intergenerational Transfers (Insurance and pensions, payments services (depository institutions) and Denomination intermediation
Roles played by FI’s
Brokerage FunctionResearch and information provider (reduces information costs such as agency costs)Economies of Scale (decreases transaction costs and information costs)
Asset – Transformation FunctionPurchase primary claims and issue secondary claims (reducing contracting costs)Allows for risk sharing via diversification (reduces price and liquidity risk)
Other Functions
Maturity IntermediationProvides households with desirable maturitiesIntermediaries are willing to accept longer term risks and finance them with short term deposits.
Denomination IntermediationCommercial paper is issued in $250,000 units, too large for most households
Payment MechanismFacilitate the payment of claims w/o cash.
Special Roles played by FI’s
Transmission of Monetary PolicyThe liquid nature of depository institutions make them the main way monetary policy is transmitted to the public
Credit AllocationPrimary suppliers of capital to special sectors of the economy (Residential lending for example)
Intergenerational Transfer of WealthInsurance and pension funds
The Impact of FI’s on Economic Growth
Traditional Economic Theories of GrowthLabor Usage and Capital AccumulationLimited by decreasing marginal returns to capital -- sustained growth requires productivity growth
New Growth TheoryTechnological change increases productivity that offsets diminishing marginal returnsFinancial Sector Development promotes productivity growthTermed “Endogenous Growth”
The Impact of FI’s on Economic Growth
Financial Development’s ImpactPromotes Capital Accumulation & Productivity GrowthRajan and Zingales (1998)
Young firms in higher productivity sectors depend upon external financing and benefit from low cost financing associated with financial development
Galindo, Schiantarelli, and Weiss (2002)Financial liberalization in developing economies improves capital allocation
Both Studies stress the importance of the quality of regulation, supervision and enforcement.
Regulation
Given their vital role in the economy FI’s are highly regulated. The goal of this regulation is to protect against a disruption in the services they offer (provide confidence in the system).Some segments of the population could be discriminated against without regulation (race, gender etc)The difference the private benefits and private costs of regulation are the net regulatory burden.
Safety and Soundness Regulation
Protects borrowers and depositors against failure of the FIDiversification requirementsMinimum capital to asset ratiosGuaranty funds provisionsMonitoring and surveillance
Monetary Policy Regulation
Since Financial Intermediaries serve as a conduit for monetary policy they merit special regulation.Reserve requirements, for example.Might make control of monetary policy more predictable.
Credit Allocation Regulation
Supports lending to portions of the economy deemed socially important (housing and farming are two examples).
Requiring a % of assets in a particular sector of the economy for example. Also interest rate restrictions.
Consumer Protection Regulation
Home Mortgage Disclosure ActPrevents discrimination in lending based upon gender, race, age, or income. Requires standardized form on why credit is granted or deniedMay provide a heavy net regulatory burden without an offsetting social benefit.
Investor Protection Regulation
Protection of investors that use investment banks directly. Insider trading restrictions, lack of disclosure and breach of fiduciary responsibility are examples.
Entry Regulation
Barriers to entry can promote safety and soundness.Also impose costs on current market participants.